Best & Worst ETFs and Mutual Funds: Mid Cap Blend Style

The Mid Cap Blend style ranks seventh out of the twelve fund styles as detailed in my Style Rankings for ETFs and Mutual Funds report. It gets my Dangerous rating, which is based on aggregation of ratings of 16 ETFs and 321 mutual funds in the Mid Cap Blend style as of July 18, 2013. Prior reports on the best & worst ETFs and mutual funds in every sector and style are here.

Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Mid Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 27 to 3023), which creates drastically different investment implications and ratings. The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst, which allocate too much value to Neutral-or-worse-rated stocks.

Investors should not buy any Mid Cap Blend ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this style, you should buy a basket of Attractive-or-better rated stocks and avoid paying undeserved fund fees. Active management has a long history of not paying off.

Figure 3 shows that 333 out of the 2433 stocks (over 19% of the market value) in Mid Cap Blend ETFs and mutual funds get an Attractive-or-better rating. However, zero out of 16 Mid Cap Blend ETFs and zero out of 321 Mid Cap Blend mutual funds get an Attractive-or-better rating.

Amdocs Inc. (DOX) is one of my favorite stocks held by Mid Cap Blend ETFs and mutual funds and earns my Very Attractive rating. Amdocs has grown profits (NOPAT) by 40% compounded annually since 2000, and has a return on invested capital (ROIC) of 11%. DOX serves major telecommunications and technology companies through billing, order management, and customer care services, and has the largest client portfolio in its industry. As these large companies compete and expand into emerging markets in Asia, DOX will expand along with them. Despite its excellent track record of growth and future growth opportunities, the stock trades at a discount to its no-growth value. At ~$39/share, DOX trades has a price to economic book value ratio of 0.8, which means that the market expects DOX’s profits to permanently decline by 20%. DOX is well positioned for future growth, and investors should consider this stock while it still trades at this discount.

Service Corporation International (SCI) is one of my least favorite stocks held by Mid Cap Blend ETFs and mutual funds and earns my Dangerous rating. SCI’s profits (NOPAT) have fallen by 3% compounded annually since 1998 and its return on invested capital (ROIC) of just 2% puts it in the bottom quintile of all companies I cover. Despite this contraction over the past 14 years, SCI is trading at a valuation that embeds an awful lot of NOPAT growth. To justify ~$19/share, the company must grow NOPAT by over 13% compounded annually for 11 years. Judging by SCI’s past growth, it seems highly unlikely the company will meet these expectations. SCI is too expensive at its current price. Investors should look elsewhere.

Figures 4 and 5 show the rating landscape of all Mid Cap Blend ETFs and mutual funds.